If corporate governance is an ecosystem, Stanley D. Bernstein, a founding partner of Bernstein Liebhard, plays a pivotal role on behalf of institutional investors who want to exert a greater influence on the interaction between boards and management. A director would argue that the threat of being named a defendant in a class action suit is overly litigious and potentially costly to the company and therefore its shareholders. The constant threat of litigation could lead to a dangerous shift from making the right decisions on behalf of investors to making decisions that will survive a technical and legal inquiry.
Stanley Bernstein
However, since the Reform Act of 1995, corporate governance has been in an evolving state of turmoil spurred by several well-known business failures. This has led to greater investor angst and the consequence of increased litigation aimed at directors. To get the plaintiffs’ insight into these issues, NACD Managing Director and Senior Advisor Jeffrey M. Cunningham conducted an in-depth interview with Bernstein, one of America’s leading securities and corporate governance plaintiff attorneys. Bernstein offers NACD members his candid assessment of the major issues around liability and litigation today and offered advice on what boards must do to limit their exposure and better perform their role especially in light of the important implications of the Dodd-Frank Act on corporate governance.
How did you get your start in the plaintiffs’ bar?
Ironically. My career started at Weil Gotshal as a securities and commercial litigation associate, representing corporate America as plaintiffs. Fast forward, in the 1980s my wife was named “lead plaintiff” in one of the largest securities frauds involving a company named “Crazy Eddie.”
That’s insane.
Precisely. Now, hanging on my wall is my wife’s stock certificate for 25 shares of Crazy Eddie. We had lost most of the small investment due to the famous fraud. I asked a lawyer to bring a securitiesfraud class action. It ultimately settled for more than $50 million, a very large sum at the time. After it was over, I realized, “Heck, I can do this, too. And probably better.” Our firm, Bernstein Liebhard, has today grown to be one of the powerhouses in securities litigation nationwide, representing large institutional holders and more than 10 states and state public pension funds in securities litigation.
Crazy Eddie stock certificate on Stanley Bernstein's office wall.
How competitive is your end of the business?
Ultra cutthroat. It has become a full-time practice just to court institutional investors. Today, if a public pension fund issues an RFP to establish a panel of securities litigation firms, they are likely to get 30 or 40 law firms responding. The Reform Act has empowered the institutional investors in their selection of counsel and in negotiating fees very aggressively, which has perhaps inured to the benefit of the classes.
What was the impact of Milberg Weiss and Bill Lerach departing the business?
Most of the name partners of Milberg left the practice but the firm is alive. Its California office split off several years ago and is quite active in its own right. The plaintiffs’ bar is quite resilient. You can throw legislative, judicial and legal hurdles in the way, but there’s a way to overcome them all by pleading, lobbying and replacing one talent with the next generation of talent.
So the prospects for profitable litigation are good?
Ben Franklin was wrong: death and taxes are not the only certainties. Fraud is, too. And so will be fraud litigation. But there are certain cases that are not economic to pursue because they’re just so expensive to litigate. That has led to more competition on the remaining cases.
What is it about a particular case that makes it expensive?
The biggest driver right now is electronic discovery, which has transformed all types of litigation and any significant case that survives a motion to dismiss.
Presumably due to volume?
Nobody has come up with a magic bullet of how to examine 10 or 20 million documents quickly. Today, every piece of paper and electronic communication is saved. Ten years ago, documents were shredded, and not necessarily nefariously. Now, people don’t write notes, they send emails, Blackberry messages, instant messages, and there is a record for all of it and it’s ghastly expensive to gather and ghastly expensive to review. But in those silos are the perennial needles in the haystack. I think one of the other sea changes is that because of the recession, many large defense law firms don’t have that much business, so in cases that would have been resolved earlier in the past, there may be an incentive by the defense to stretch out the eventual sit-down to resolve the matter.
How important is it to you to represent the class?
That’s why we live. It is essential to our mission to protect investors.
Now, wasn’t the PSLRA (Private Securities Litigation Reform Act) of 1995 intended to reduce securities litigation?
Yes, and it has invigorated it in ways that only the most prescient could have envisioned. The largest impact is the misguided belief that with the heightened pleading standard and the requirement for a “lead plaintiff,” it would be more difficult, if not impossible, for institutional investors to use securities litigation as a vehicle to accomplish goals and right wrongs. But the unintended consequence is that investors actually saw this as their vehicle to show their beneficiaries that they’re fighting hard to reform corporate America, and with respect to the heightened pleading standards, it forced the plaintiffs’ bar to sharpen its tools, and file better complaints. Candidly, some of those complaints prior to the Reform Act were not up to par. So, we’ve uncovered methods to plead cases that are far superior to anything that existed prior to 1995, through the use of investigators, the internet, whistleblowers, confidential witnesses— and, yes, the requirement to have a lead plaintiff with a significant financial interest in the outcome.